London — Saudi Arabia, the world's largest crude exporter, has suspended all its oil shipments through the Bab el-Mandeb strait at the southern tip of the Red Sea, following an attack on two VLCCs by Yemeni Houthi militia.
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Tensions over threats to oil assets and key transit routes in the Middle East are expected to escalate, as the war in Yemen appears to be spilling into the shipping lanes of the southern Red Sea.
While not as well-transited as the nearby Strait of Hormuz, Bab el-Mandeb is nonetheless a critical chokepoint for oil shipments, with some 4.8 million b/d of crude and products passing through in 2016, according to the US Energy Information Administration.
The strait is just 18 miles at its widest point, and tanker traffic is limited to two two-mile-wide channels for inbound and outbound shipments, the EIA said.
KEY TRANSIT POINT
**About 1.5 million b/d of crude oil from Gulf Arab states Saudi Arabia, Kuwait and Oman moves through the Red Sea and then through the SUMED pipeline via northern Egypt. The bulk of Europe's crude oil imports from the Middle East arrive via this route.
**About 1 million b/d of Iraqi and Iranian crude also passes through Bab al-Mandeb to deliver oil to Europe and Turkey.
**Some of Asia's crude oil imports from Libya, Kazakhstan, Azerbaijan, North Sea and Russia also transit Bab el-Mandeb.
**The Middle East and Asia also receive key refined products, such as naphtha and fuel oil from Europe via this key route.
**Europe imports the bulk of its jet fuel consumption from the Middle East, almost all of which moves through Bab el-Mandeb. Products like gasoil and diesel also move to Europe and Turkey from Asia through the strait.
**Saudi Arabia ships about 10% of its total crude exports to Europe through the Red Sea. Saudi exports in June averaged around 7.5 million b/d, according to S&P Global Platts estimates.
**The strait is also critical to Saudi Arabia's own Red Sea refineries, which are mainly supplied with crude oil produced in its eastern region shipped from the Persian Gulf.
**Oil prices have had a somewhat muted reaction to the closure. At 0932 GMT, ICE September Brent crude futures were up 37 cents/b from Wednesday's settle at $74.30/b, while the NYMEX September light sweet crude contract was down 6 cents/b to $69.24/b.
**Close to 2 million b/d of crude and oil products bound for Asia that transit the strait could be affected if the situation deteriorates further, according to Takayuki Nogami, chief economist at Japan Oil, Gas and Metals National Corp.
**This includes around 300,000 b/d crude and oil products shipments bound for Asia from Red Sea facilities in Saudi Arabia, Nogami said.
**The Saudi oil ministry has not revealed the names of the attacked VLCCs. However, the Ghawar and Shiblah are the only two VLCCs owned by Saudi state-owned shipping company Bahri which appear to have been operating close to Yemen at the time of the incidents, according to S&P Global Platts trade flow software cFlow.
**Bahri expanded its VLCC fleet to 46 earlier this year, cementing its position as the owner of the world's largest VLCC fleet.
**Bahri also operates 36 chemical and product tankers, six multi-purpose vessels and 5 dry bulk carriers
**Any of these vessels moving between Europe and Asia will now need to travel around Africa, adding several thousand nautical miles to their journeys. This additional distance would significantly tighten supply in the tanker sector, putting upward pressure on freight rates.
**So far no significant impact on freight rates has been observed.
WAR IN YEMEN
**The war in Yemen has raised concerns over security in the Red Sea. Saudi-led Arab forces are pitted against the Houthis, who seized control of the Yemeni capital Sana'a in late 2014, driving out the government. The Saudi-led coalition accuses regional rival Iran of backing the Houthis.
**The Houthis continue to control the capital and much of northern Yemen, as well as the Red Sea oil terminals at the Ras Isa and Hodeidah ports.
**Iranian officials have threatened to disrupt oil shipments in the region if US sanctions cut off its oil exports. The sanctions snap back November 4.
**Last week, Saudi Aramco said operations at its 140,000 b/d Riyadh refinery were normal after local authorities extinguished a "limited fire" at the plant. Aramco did not give a specific cause of the fire, but the statement came not long after Yemeni Houthi militants said they attacked the refinery in the Saudi capital using a drone.
--Edited by Jeremy Lovell, email@example.com